Nortel Posts Huge Loss, Sets Further Cost Cuts

WEBINAR:On-Demand

Nortel Networks will layoff employees as part of a new round of cuts on the heels of reporting a $3.4 billion quarterly loss. Shares in the telecom device maker, once valued at more than 1,100 Canadian dollars per share are now at $1.22 Canadian per share. Nortel cited the global economic downturn's impact for the results.

By Wojtek Dabrowski

TORONTO (Reuters) - Nortel Networks Corp reported a $3.4 billion quarterly loss on Monday and announced a round of sweeping new cost cuts, including 1,300 layoffs, as a global economic downturn erodes its business and strains its balance sheet.

The economic downturn also forced Nortel, North America's biggest maker of telephone gear, to cut its 2008 outlook again, as telecommunications customers reduce spending on equipment. The news pushed Nortel's stock, once valued at more than C$1,100 a share, down another 18 percent to C$1.22.

The new job cuts represent about 5 percent of Nortel's roughly 30,000-strong workforce. The company said it would also freeze salary increases, cut back on consultants and review its entire real-estate portfolio.

The moves are Nortel's latest response to a rapid deterioration of the business environment that the company had highlighted earlier this fall, Chief Executive Mike Zafirovski said during a conference call.

"I can assure you that the sense of urgency which we had in mid-September has only accelerated these last two months," he said. "This is a critical time for Nortel."

Several senior executives will leave the company early next year as the company streamlines its operations, he said.

The company said the latest cost-cutting, along with the moves announced earlier, will lead to annual savings of about $400 million in 2009.

But the new moves will also mean total charges to earnings and cash outlays of about $130 million.

The cost cuts notwithstanding, Nortel's balance sheet and its business setbacks make the company attractive only to investors who betting that it will be broken up or sold, said Duncan Stewart, president of Duncan Stewart Asset Management in Toronto.

"It only exists as a possible speculative break-up value play," he said. "As Nortel exists today, it cannot become a successful global leader in the telecom equipment industry."

The Toronto-based company posted a third-quarter loss of $3.4 billion, or $6.85 per share, compared with a year-earlier profit of $27 million, or 5 cents a share.

The loss included a tax adjustment of $2.07 billion and a $1.14 billion writedown of goodwill.

In September, the company said 2008 revenue would fall between 2 percent and 4 percent. Now, just two months later, Nortel said the decline would be at the high end of that range.

"In light of the economic and market conditions ... Nortel continues to experience significant pressure on its business and the deterioration of its cash and liquidity," the company said.

In the latest quarter, revenue fell to $2.3 billion from $2.7 billion, in line with analyst expectations, according to Reuters Estimates.

NO UPDATE ON METRO ETHERNET

The company provided no update regarding the potential sale of its Metro Ethernet Networks business, which includes its optical and carrier ethernet technology.

In September, it said it wanted to sell the unit, which accounts for about 14 percent of revenue. The financial crisis has meant many would-be buyers are preserving cash rather than spending it on acquisitions.

Nortel also said it would suspend dividends on two series of preferred shares issued by its main operating subsidiary. Although it is able to pay the dividends, Nortel said its board decided that "in this uncertain economic environment it would be prudent to maintain liquidity and preserve cash."

Nortel has suffered as telecommunications companies scale back spending on equipment and upgrades. Meanwhile competition has stiffened, both from North American and European players such as Alcatel-Lucent and from low-cost Asian vendors like Huawei Technologies.

Since 2001, Nortel has lost billions of dollars, shed thousands of jobs and has been unable to turn a consistent profit because of such factors.

The company's workforce has shrunk from a peak of 90,000 in 2000, before the technology bubble burst. Still, the 1,300 layoffs announced on Monday were actually fewer than the 3,000 to 5,000 that analysts had expected.

On Monday, Nortel shares fell 27 Canadian cents, or 18 percent, to C$1.22 on the Toronto Stock Exchange. In mid-2000, they were worth more than C$1,100 each, adjusted for a stock consolidation that took place in late 2006.